Why Luxury Apartment Buildings Have Empty Units and High Turnover

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Luxury apartments are the ones with glass walls, rooftop pools, and high rent. You might have noticed that there are a lot of them but they are always advertising vacancies. Why don’t they just lower the rent? They also tend to have very low deposit requirements, which is strange. Why is that?

Rent Control and High Turnover

Many big cities have rent control measures. Generally, rent control prevents landlords from significantly raising the rent on current tenants. For example, in DC, landlords typically can’t raise the rent more than $50-$100 once a year for every $1000 of rent. But, when the apartment is empty, landlords are free to raise the price. That means that it makes sense for landlords who are making renovations or have purchased a building in an up and coming neighborhood to have high turnover, so they can frequently raise the rent. That’s why in some buildings, you’ll see them post $2500 for rent but then require only a $400 deposit. The less you’re committed to a place, the faster you’ll move out. It’s also why such buildings can appear fancy on the outside, but the service provided by the landlord and property manager is far from “luxury.” When they want you to move out, they won’t be attentive to your problems.

With traditional housing, it’s the opposite – high turnover is BAD for landlords. Finding new, quality tenants is expensive. The more tenants a landlord has over time, the higher chance that one of them will be a monstrous, trouble renter. It’s more stress from an investment that a landlord would ideally like to not worry about. So in many ways, the incentives of landlords in affordable housing favor tenants. But rent control, especially in gentrifying neighborhoods, has the unintended side effect of flipping those incentives on their head. Some variations of rent control laws attempt to fix this problem.

The Value of a “Luxury” Feel

Another factor is that the landlord wants to maintain a luxurious feel for these well-off tenants. Renters who pay premium prices expect to be surrounded by people in a similar economic class. The more low-income tenants that they allow to pass through the lobby, the less that snobby renters will want to rent there. At least, in theory. Mixed-income housing is controversial, and the effects are still being studied. It’s unclear whether the impact of snobby tenants is significant enough to outweigh the costs of empty units.

One thing is clear – purchasers and developers care about the whether the building has premium rent prices. When pricing an apartment building, the potential for the building is calculated, taking into account the average rent of the building. If fewer renters are paying an above-market price, then it reflects well on the building. On the other hand, when a building has fewer vacancies, but everyone is paying less than the luxury building across the street (the one with empty rooms), it may be perceived as a less luxurious building. In gentrifying neighborhoods, where the average income is expected to rise, it makes sense for developers to purchase buildings that can meet the demand for the most luxurious buildings. There’s also a sense of pride from owning the shiniest, fanciest building. So the valuation of a luxury building may not be strictly in how much money it produces, but instead, how fancy the place is.

 

By |July 24th, 2018|Urban Planning|